Brexit Aftershock: UK Real Estate, Pound and Bond Yields Continue to Fall
Volatility continued on July 6 in the wake of the U.K.’s Brexit vote. The pound touched $1.28, a level not seen since 1985. Yields on top tier sovereign bonds continued to drop with no end in sight, according to experts.
The yield on the benchmark 10-year Treasury note, which moves inversely to its price, hit a record low of 1.318 percent on July 6. The yield has dropped more than 35 basis points since the U.K. voted to leave the European Union, which means investors are taking risks of the table.
Some experts believe the Brexit shock could force U.S. Treasury yields below the 1 percent mark.
“We no longer control our yield curve. Our yield curve has been captured by Europe,” Allianz Chief Economic Adviser Mohamed El-Erian told CNBC.
“We have this massive disconnect between domestic economic conditions and a yield curve that prices lots of other things in the economy, and that disconnect is something that we don’t quite fully understand, but it’s most likely going to lead to a further disconnect between economics and finance.”
Gold, another safe-haven asset like bonds, jumped to more than $1,370 per ounce, a fresh high for the year.
Switzerland’s 50-year bond yield fell below zero for the first time while the yield on 10-year U.K. gilts dropped further hitting record lows at 0.723 percent.
The Japanese government 10-year bond yield was -0.27 percent and the 10-year German Bunds were at -0.18 percent on July 6.
The dramatic slide in the pound from $1.50 last month to $1.28 signals how concerned investors are about owning British assets.
The pound’s latest drop was driven by a number of large U.K. fund managers halting redemptions to prevent investors from withdrawing money out of real estate funds.
Three more fund managers announced on July 6 they would freeze trading some of their property funds, after the announcements of Standard Life, Aviva and M&G Investments early in the week.
Henderson Global Investors, Columbia Threadneedle Investments and Canada Life suspended trading in at least 5.7 billion pounds ($7.4 billion) of property funds, according to CNBC.
The total value of real estate assets frozen by U.K. fund managers reached 14.8 billion pounds ($19.2 billion). About 24.5 billion pounds ($31.8 billion) is allocated to U.K. real estate funds, according to the Investment Association.
Some experts fear a severe initial correction in the U.K. property market. Hence, U.K. house builders and real estate firms deeply rooted in the English economy took a big hit with the Brexit vote.
The country’s four major housebuilders, Taylor Wimpey, Persimmon, Barratt, and Berkeley, have lost nearly 40 percent of their value since the referendum on June 23.
Following the referendum, research firm Preqin surveyed over 140 alternative investment fund managers and over 50 institutional investors to find out their views on the impact Brexit.
According to the survey, 7 percent of U.K.-based alternative fund managers are currently considering moving operations outside the U.K., and a further 17 percent are uncertain at this stage.